Still Think Financial Markets = Financial Investment?

For those STILL too gullible to believe that we will never recover until we stop the irresponsible hoarding and gambling behaviours of Wall Street through a property tax on large securities holdings, I present the following:

Our economy doesn’t need to print more money. The economy must have had about $1.5 TRILLION more money at the end of 2010 than it started with. What we need to do is make the banksters and uber-rich pay their fair share and stop glomming off old age pensioners.

Full disclosure here: I followed the link, but didn’t read the full article.

Mainly because I’ve seen like a thousand other of these “U.S. can never repay the national debt articles”, and read a few of them. And those few I have read are really terrible shambles of economic misunderstanding that wouldn’t (or at least shouldn’t) get past an Econ 101 professor.

Not that they’re wrong about the national debt being dangerous. That it is. But for reasons other than those claimed in the articles.

No, what’s really egregiously bad about a lot of these articles is that they display a horrible lack of understanding of money and how it’s created.

Money is essentially a social convention, an agreed upon unit of account, exchange and store of value created to facilitate the sharing of goods and services among a group or groups of people. That’s it. Money, in and of itself, has no value. It’s only worth something because a buch of people like you and me pretend it is.

That said, credibility being the wellspring from which money flows, there are only two institutions with enough credibility to issue currency that will have wide enough acceptance to be practical: Governments and Banks.

And the way they do it is shockingly simple. All it takes is double-entry accounting. It doesn’t take gold or silver or physical assets of any kind, and it doesn’t even take a printing press. All the bank or government has to do is to promise to pay people X# of currency units when they present a document demanding payment. The global accounting entry looks like this:

Credit: Liability on the books of bank or government
Debit: Receivable asset on the books of currency holder

Now, in the old days, in order to minimize counterfeiting, the issuing bank or government required an actual physical token made in some unique and dificult to reproduce manner. But that got to be cumbersome as the population grew way too large in relation to the available gold or silver.

While that is theoretically very simple, in actual practice acheiving the type of credibility that allows this requires a variety of tricks, and a lot of them still require reference to ultimate payment in some type of tangible good, maybe like oil. And there are some useful distinctions to be made between the various types of money based on the promised payment that they reference.

For example, the so-called M2 category of money includes coins, dollar bills and bank deposits covered by the FDIC. Ultimately their value is backed by the productive capacity of the country issuing the currency, but that is reinforced by the government’s promise to insure these deposit balances.

That’s the key distinction, and that’s the problem. See, M3, the type of money created by banks, or at least created by banks for wealthy corporations and wealthy people, traditionally HASN”T been backed by the FDIC. If that shit fell apart, it was gone and lost forever. And bad cess to them for their wicked old gambling ways.

But that’s changed now. The bailout basically created an unlimited obligation of the U.S. government to guarantee the value of the bullshit M3 money supply that we the people have next to ZERO anti-counterfeiting oversite of. Or effective oversight, anyhow. There are SEC regulations, etc. on the books, but they’re arcane and nobody in power seems very interested in enforcing them.

Anyhow, to get back to the point about why the “U.S. can never repay debt” stuff is bullshit. The U.S. can ALWAYS print more money and take advantage of the inflation factor to pay debt by reducing its value relative to the new stuff. Or, as I would prefer to see done, it can tax enough money to pay the debt down. It’s all just accounting entries.

Yes, some of those accounting entries can have some HORRIBLE, HORRIBLE consequences that none of us ever want to see in our lifetimes. But to say that it is just mathematically impossible to repay the debt is just utter bullshit.

Jordan

This is horrible.

kuB2

It seems to me the Fed is giving money to banks to buy financial instruments. The fed essentially overpaid for bonds all year long and the US gov is funneling money to the banks through Fannie and Freddie (subsidizing foreclosures). The banks are still insolvent (accounting tricks). Something like 20% are over 90 days behind in their mortgage payments in the Chicago area (for example). We need serious policy changes towards workers and trade. I think the govt is just going to write off another 10% (citizens) so expect 20% perma poverty in the US.

I agree, espically the last part. This is the new America. Get use to %10 unemployment. Americans took it for granted that they would be able to go to companies and get hired with ZERO job skills.

Liam_McGonagle

That’s about the size of it. We’re underwriting the plutocrats’ gambling machine.

It’s their world. We just live in it.

For the time being, anyhow.

kuB2

It seems to me the Fed is giving money to banks to buy financial instruments. The fed essentially overpaid for bonds all year long and the US gov is funneling money to the banks through Fannie and Freddie (subsidizing foreclosures). The banks are still insolvent (accounting tricks). Something like 20% are over 90 days behind in their mortgage payments in the Chicago area (for example). We need serious policy changes towards workers and trade. I think the govt is just going to write off another 10% (citizens) so expect 20% perma poverty in the US.

I agree, espically the last part. This is the new America. Get use to %10 unemployment. Americans took it for granted that they would be able to go to companies and get hired with ZERO job skills.

gondolfin

If u chech those Dow-Jones listed companies, all the money goes to China. Activity on Wall Street does not give growth in US, that’s an illusion. Trading is not making values locally (U.S.). Here’s has happened in energy the last 2 years (UK and US sectors) according to this Scottich oil-analyst. The growing results in the Banking-business… well listen carefully.
Who’s buying oil from who, and where is the growth?

Right on. And even more money, I suspect, is just vanishing up into a digital ether, providing actual investment in tangible assets to nobody at all. Nobody other than the security holder who cashes out for government-backed M2 money later on.

I admit I poo-pooed this early on (as my comments under the article will make clear). But mostly because I was fixated on the general point that financial markets are so poorly regulated overall that they are breeding grounds for unproductive scams of any description. I considered “high frequency trading” just a foot note, a minor tactical point. I’m changing my mind about that now.

In any regard, I’m more and more convinced that the ultimate solution will be a property tax on large securities holdings and increased federal stimulus. Admittedly, none of the dimwits in office or anyone likely to take office in the near future seems to have even the slightest glimmer of a clue that this is the case.

Possibly Bernanke’s desperate but I suspect ultimately futile QE2 represents his chance encounter with reality. The idea seemed to be that you shake money out of the bonds that have been lying dormant, waiting for the disproportionately uber-rich holders to cash them in for government backed M2 money.

However (and it should have come as no surprise to anybody) those rich assholes have more than enough cash on hand already, and see no need to ‘risk’ it on enterprises which produce actual goods and services. Not when IRS stats for 2007 showed non-financial businesses achieving typical margins of 8.3% or so and 2010’s Dow Jones went up 17.1%. In the short term, for these vampiric shitstains, long-term macroeconomic and civic concerns will only be academic, but “profits” will be for-real.

Anonymous

If u chech those Dow-Jones listed companies, all the money goes to China. Activity on Wall Street does not give growth in US, that’s an illusion. Trading is not making values locally (U.S.). Here’s has happened in energy the last 2 years (UK and US sectors) according to this Scottich oil-analyst. The growing results in the Banking-business… well listen carefully.
Who’s buying oil from who, and where is the growth?

as someone who daytrades through an online broker as one of my sources of income, and i manage my own retirement portfolio, i would argue that its the general masses that need to be educated about financial markets at an early age alongside with credit and saving.
Attacking everyone who uses the markets to make money (big and small) is shortsighted and stupid. i am in the lowest tax bracket there is. Frankly, the problem is having the regulators in bed with the people they are regulating.

gondolfin

That’s a good point, but as u and I know this, the majority of the people are lied to every hour of day. Shall we all be the jolly betters? Employ Mexicans (sorry about that notion, Mexicans) to mend the plumbing? Because the market demand more gamblers, not handy-men because they want a decent pay?

Liam_McGonagle

That’s my point. It’s not the market’s existence that is the problem, it’s the perversity of their current structure.

I suspect that Fretboard just looked at the headline and didn’t read the article. Though that’s pretty sadly disappointing. It’s a pretty short-to-the-point article.

Fretboardonfire

as someone who daytrades through an online broker as one of my sources of income, and i manage my own retirement portfolio, i would argue that its the general masses that need to be educated about financial markets at an early age alongside with credit and saving.
Attacking everyone who uses the markets to make money is shortsighted and stupid. i am in the lowest tax bracket there is.

the fed can print all the money it wants. it makes almost no difference. as the real economy improves the value of the dollar moves up. currencies are priced on valuation in the forex market just the same as shares in a company are valued. if you want to tax rich people, just tax rich people. if you want to stop banks from acting like common street thugs, then regulate them and dont loosen the regulations in another 10-20 years when no one remembers what happened. wallstreet will always be profitable before the economy improves so long as there are financial markets at all.

Liam_McGonagle

The English language recognizes critical distinctions between the words “every” and “large”.

That’s why I wrote “property tax on LARGE securities holdings” rather than “property tax on EVERY securities holding”.

I think some people might be mislead into thinking you are characterising my article as an existential attack on the notion of financial markets. That is a conclusion they could never come to if they actually read my article or had a grasp of basic English.

I don’t think we have any fundamental disagreement here, but I wish you’d be a bit more careful in how you characterize the article.

Fretboardonfire

as someone who daytrades through an online broker as one of my sources of income, and i manage my own retirement portfolio, i would argue that its the general masses that need to be educated about financial markets at an early age alongside with credit and saving.
Attacking everyone who uses the markets to make money (big and small) is shortsighted and stupid. i am in the lowest tax bracket there is. Frankly, the problem is having the regulators in bed with the people they are regulating.

Fretboardonfire

as someone who daytrades through an online broker as one of my sources of income, and i manage my own retirement portfolio, i would argue that its the general masses that need to be educated about financial markets at an early age alongside with credit and saving.
Attacking everyone who uses the markets to make money (big and small) is shortsighted and stupid. i am in the lowest tax bracket there is. Frankly, the problem is having the regulators in bed with the people they are regulating.

gondolfin

When WS and the banks has grown into Ladbrokes odds and betting-shops for people well-off, the only solution left is to bring them down, the faster the better,and mortficate all loans. Then the assets is back on Joe’s and Jane’s hands again, simple as that. The Banking share-owners? I say: Die!!!

Anonymous

When WS and the banks has grown into Ladbrokes odds and betting-shops for people well-off, the only solution left is to bring them down, the faster the better,and mortficate all loans. Then the assets is back on Joe’s and Jane’s hands again, simple as that. The Banking share-owners? I say: Die!!!

Anonymous

When WS and the banks has grown into Ladbrokes odds and betting-shops for people well-off, the only solution left is to bring them down, the faster the better,and mortficate all loans. Then the assets is back on Joe’s and Jane’s hands again, simple as that. The Banking share-owners? I say: Die!!!

Anonymous

That’s a good point, but as u and I know this, the majority of the people are lied to every hour of day. Shall we all be the jolly betters? Employ Mexicans (sorry about that notion, Mexicans) to mend the plumbing? Because the market demand more gamblers, not handy-men because they want a decent pay?

Anonymous

That’s a good point, but as u and I know this, the majority of the people are lied to every hour of day. Shall we all be the jolly betters? Employ Mexicans (sorry about that notion, Mexicans) to mend the plumbing? Because the market demand more gamblers, not handy-men because they want a decent pay?

Fretboardonfire

as someone who daytrades through an online broker as one of my sources of income, and i manage my own retirement portfolio, i would argue that its the general masses that need to be educated about financial markets at an early age alongside with credit and saving.
Attacking everyone who uses the markets to make money is shortsighted and stupid. i am in the lowest tax bracket there is.

the fed can print all the money it wants. it makes almost no difference. as the real economy improves the value of the dollar moves up. currencies are priced on valuation in the forex market just the same as shares in a company are valued. if you want to tax rich people, just tax rich people. if you want to stop banks from acting like common street thugs, then regulate them and dont loosen the regulations in another 10-20 years when no one remembers what happened. wallstreet will always be profitable before the economy improves so long as there are financial markets at all.

Liam_McGonagle

Right on. And even more money, I suspect, is just vanishing up into a digital ether, providing actual investment in tangible assets to nobody at all. Nobody other than the security holder who cashes out for government-backed M2 money later on.

I admit I poo-pooed this early on (as my comments under the article will make clear). But mostly because I was fixated on the general point that financial markets are so poorly regulated overall that they are breeding grounds for unproductive scams of any description. I considered “high frequency trading” just a foot note, a minor tactical point. I’m changing my mind about that now.

In any regard, I’m more and more convinced that the ultimate solution will be a property tax on large securities holdings and increased federal stimulus. Admittedly, none of the dimwits in office or anyone likely to take office in the near future seems to have even the slightest glimmer of a clue that this is the case.

Possibly Bernanke’s desperate but I suspect ultimately futile QE2 represents his chance encounter with reality. The idea seemed to be that you shake money out of the bonds that have been lying dormant, waiting for the disproportionately uber-rich holders to cash them in for government backed M2 money.

However (and it should have come as no surprise to anybody) those rich assholes have more than enough cash on hand already, and see no need to ‘risk’ it on enterprises which produce actual goods and services. Not when IRS stats for 2007 showed non-financial businesses achieving typical margins of 8.3% or so and 2010’s Dow Jones went up 17.1%. In the short term, for these vampiric shitstains, long-term macroeconomic and civic concerns will only be academic, but “profits” will be for-real.

Liam_McGonagle

That’s about the size of it. We’re underwriting the plutocrats’ gambling machine.

It’s their world. We just live in it.

For the time being, anyhow.

Liam_McGonagle

The English language recognizes critical distinctions between the words “every” and “large”.

That’s why I wrote “property tax on LARGE securities holdings” rather than “property tax on EVERY securities holding”.

I think some people might be mislead into thinking you are characterising my article as an existential attack on the notion of financial markets. That is a conclusion they could never come to if they actually read my article or had a grasp of basic English.

I don’t think we have any fundamental disagreement here, but I wish you’d be a bit more careful in how you characterize the article.

Liam_McGonagle

That’s my point. It’s not the market’s existence that is the problem, it’s the perversity of their current structure.

I suspect that Fretboard just looked at the headline and didn’t read the article. Though that’s pretty sadly disappointing. It’s a pretty short-to-the-point article.

Liam_McGonagle

Full disclosure here: I followed the link, but didn’t read the full article.

Mainly because I’ve seen like a thousand other of these “U.S. can never repay the national debt articles”, and read a few of them. And those few I have read are really terrible shambles of economic misunderstanding that wouldn’t (or at least shouldn’t) get past an Econ 101 professor.

Not that they’re wrong about the national debt being dangerous. That it is. But for reasons other than those claimed in the articles.

No, what’s really egregiously bad about a lot of these articles is that they display a horrible lack of understanding of money and how it’s created.

Money is essentially a social convention, an agreed upon unit of account, exchange and store of value created to facilitate the sharing of goods and services among a group or groups of people. That’s it. Money, in and of itself, has no value. It’s only worth something because a buch of people like you and me pretend it is.

That said, credibility being the wellspring from which money flows, there are only two institutions with enough credibility to issue currency that will have wide enough acceptance to be practical: Governments and Banks.

And the way they do it is shockingly simple. All it takes is double-entry accounting. It doesn’t take gold or silver or physical assets of any kind, and it doesn’t even take a printing press. All the bank or government has to do is to promise to pay people X# of currency units when they present a document demanding payment. The global accounting entry looks like this:

Credit: Liability on the books of bank or government
Debit: Receivable asset on the books of currency holder

Now, in the old days, in order to minimize counterfeiting, the issuing bank or government required an actual physical token made in some unique and dificult to reproduce manner. But that got to be cumbersome as the population grew way too large in relation to the available gold or silver.

While that is theoretically very simple, in actual practice acheiving the type of credibility that allows this requires a variety of tricks, and a lot of them still require reference to ultimate payment in some type of tangible good, maybe like oil. And there are some useful distinctions to be made between the various types of money based on the promised payment that they reference.

For example, the so-called M2 category of money includes coins, dollar bills and bank deposits covered by the FDIC. Ultimately their value is backed by the productive capacity of the country issuing the currency, but that is reinforced by the government’s promise to insure these deposit balances.

That’s the key distinction, and that’s the problem. See, M3, the type of money created by banks, or at least created by banks for wealthy corporations and wealthy people, traditionally HASN”T been backed by the FDIC. If that shit fell apart, it was gone and lost forever. And bad cess to them for their wicked old gambling ways.

But that’s changed now. The bailout basically created an unlimited obligation of the U.S. government to guarantee the value of the bullshit M3 money supply that we the people have next to ZERO anti-counterfeiting oversite of. Or effective oversight, anyhow. There are SEC regulations, etc. on the books, but they’re arcane and nobody in power seems very interested in enforcing them.

Anyhow, to get back to the point about why the “U.S. can never repay debt” stuff is bullshit. The U.S. can ALWAYS print more money and take advantage of the inflation factor to pay debt by reducing its value relative to the new stuff. Or, as I would prefer to see done, it can tax enough money to pay the debt down. It’s all just accounting entries.

Yes, some of those accounting entries can have some HORRIBLE, HORRIBLE consequences that none of us ever want to see in our lifetimes. But to say that it is just mathematically impossible to repay the debt is just utter bullshit.

http://pulse.yahoo.com/_7IQWEDG6PFI5Y64PGEBKYDSIDY Mark

You think playing the government against the banks is going to work? The banks are printing money because the Fed is printing money. They’re in bed together and they’re both sucking each others dicks while losers like us get left out in the cold. Grow up for chrissakes.

http://pulse.yahoo.com/_7IQWEDG6PFI5Y64PGEBKYDSIDY Mark

You think playing the government against the banks is going to work? The banks are printing money because the Fed is printing money. They’re in bed together and they’re both sucking each others dicks while losers like us get left out in the cold. Grow up for chrissakes.